Why the housing market won’t collapse any time soon

    12 August 2020

    Is there anything which would cause the UK housing market to enter a sustained slump? A meteorite strike wiping out half of all life on Earth, perhaps? I wouldn’t bet on it – more likely the surviving estate agents would be reporting a surge in demand, with views of the crater attracting a hefty premium.

    I raise the question because we have just suffered a record fall in employment, with 220,000 jobs lost in the second quarter and almost certainly several million more to come as the furlough scheme in phased out. We are in the deepest recession ever measured. And how did the Halifax House Price Index (HPI) react? By going up 1.6 percent in July. The HPI is down over the past quarter, but only by 0.2 percent. Annually, the HPI has grown by 3.8 percent.

    True, like all house price indices, the HPI needs a health warning. It is based on mortgage approvals by the Halifax, and so is made up of limited data. When launched in the 1980s, the HPI was never intended to be read month-on-month, only quarter-on-quarter – and there was a greater volume of sales then than there is now.

    Even so, there is nothing in the HPI release which conflicts with anecdotal reports from estate agents – and what you can pick up by scanning the property sales website Rightmove. Houses are selling – in spite of what you might think would be the worst market conditions since the banking collapse, if not ever.

    Even in the last recession, when prices did initially fall steeply, they began to rebound strongly in some areas in March 2009. Why? Ask yourself: why did the mood in the housing market change sharply last month when prior to that it was wobbling?

    One of the headlines in Rishi Sunak’s emergency budget was temporarily to cut stamp duty to zero on homes costing up to £500,000 until next March. Personally, I am in favour of stamp duty cuts – I think it should be reduced to one or two percent, with revenue raised instead through additional bands of council tax on high-value property and from an increase in capital gains tax on property sales.

    But what Sunak did was to create a deadline, thus stoking short-term demand. It is rather like Nigel Lawson’s decision in 1988 to abolish tax relief on endowment mortgages but, crucially, to leave a window of opportunity before the new measures came into effect.   The result was to stoke an already bubbling housing market.

    Sunak didn’t have to apply the stamp duty cut to investment properties, but he did. Investors will still have to pay the three percent stamp duty rate for additional properties, but they received a very strong message, as they have done on numerous occasions in the recent past: the government is simply not going to allow the housing market to tank.

    It can’t afford to, not with all that private mortgage debt and exposure of banks. The Chancellor of the day will always bail out the housing market in order to prevent negative equity, where home loans are worth more than the homes on which they are secured. Negative equity, as we found out in 2008, is a bomb planted beneath the global financial system.

    It is the property equivalent of the “Greenspan Put”: the effective guarantee of the former Fed Chairman Alan Greenspan, that if the stock market dropped beyond a certain point the Fed would do whatever it could to put a floor beneath the slump. Investors have now become so confident that the government will always bail out the property market – through wheezes such as help-to-buy, underwriting of mortgages, subsidies and tax cuts – that they treat housing as a one way bet.

    On the face of it, the housing market still looks highly vulnerable, especially when the stamp duty holiday ends next year. But don’t be at all surprised if Sunak has more cards up his sleeve to bail out buyers – or, indeed, to supercharge their capital gains.